Saturday, February 05, 2005

Capital flight eliminated!

At last I am back at my own computer and able to write ad libitum again. I've been waiting for this moment for quite some time now: home sweet home! A lot has happened during the past few weeks, both in Venezuela and abroad, and I will try to catch up with the news by and by. As a warm-up exercise, have a look at the following. This is the kind of news item that drives me batty:

"'The country's [i.e. Venezuela's] economy will never again suffer from capital flight, as a result of which the Nation will be developed, and employment and wealth created for the people', assured the vice-minister for Endogenous Development and president of the Economic and Social Development Bank (Bandes), Edgar Hernández Behrens." [Source]

The statement is irritating on so many levels that I hardly know where to begin. First, and this may seem a minor gripe, what exactly does Hernández mean when he says "never"? Until 2021? Until the death of the Great Leader, Chávez? Until eternity? Is he making a normative or an empirical statement here? Either way, how does he suppose that it could be true?

Secondly, how and why does he suppose that limiting capital mobility will lead to development, employment, and wealth? Hernández's statement implies that stopping capital flight is a cure-all for Venezuela's economic problems. That is, of course, sheer chicanery; economic problems are always the result of a myriad of factors, and no single measure will ever address, much less solve, all of them. (In fact, if stopping capital flight were enough to cause development, employment, and wealth, then there would be a huge number of economists and government officials suddenly without work -- thereby causing more unemployment.) (Just kidding!)

Thirdly, by limiting capital mobility, Hernández is introducing a (further) disincentive for foreign investment. Who would want to invest in a country where repatriating profits could be made difficult to impossible by categorizing such an action as capital flight? And without foreign investment, local development becomes a lot more difficult (just consider the difficulties encountered by countries experimenting with autarchy -- North Korea, for instance).

Fourthly, Hernández is acting in an expectedly short-sighted fashion by trying to treat only a symptom perceived as evil (capital flight = bad) without addressing the underlying factors. He should be asking himself: why are Venezuelans desperate to get their money out of the country? Answers: a lack of faith in the legal system, devaluation of the currency (already happening, and more to come soon), preparation for emigration because of doubts about the way the country is heading, the questioning of the right to private property (viz. the recent land invasions, condoned by the government), and so on.

All too often, politicians think that they can make the laws of economics go away by combating them through legal laws -- in effect, simply ordering things to be different. Of course, that never works. An example: price controls on products may appear to make them cheaper, but in actual fact simply make them scarcer. The typical consequence is a) unsatisfied demand, expressed for instance as empty shelves in shops or long lines of people waiting to get a certain product and b) the generation of black markets.

This is easy to observe in the case of the Venezuelan currency. The government has introduced exchange controls and fixed the exchange rate at roughly 2.000 Bolívares to the dollar (Bs./$). As a consequence, a) Venezuelans are desperate to get their hands on stable foreign currency (also because they can thereby protect their monetary assets from devaluing) and b) there is a flourishing black market on which the exchange rate is approximately 2.800 Bs./$. What the government has therefore created, in effect, is a lot of dissatisfied Venezuelans plus an intransparent and inefficient currency market. Individuals and businesses suffer, as does the Venezuelan economy as a whole - this looks like a counterproductive outcome to me.

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